Plaintiff v Defendant

1 In issue is the quantum of the damages recoverable by the plaintiff ("Ms Pettiona") from the defendant ("Mr Whitbourne") as the result of Mr Whitbourne's failure to complete a contract ("the contract"). The contract was for the purchase of a residential property at 319-323 St Kilda Street, Brighton ("the property").

2 The parties entered into the contract on 5 July 2010 and settlement of the contract was due to be completed twelve months later on 4 July 2011. The purchase price was $6.5 million, of which Mr Whitbourne paid a deposit of $650,000, leaving a balance of $5,85 million payable on the settlement date. When Mr Whitbourne failed to pay the balance of the contract price on 4 July 2011, Ms Pettiona's solicitors served a Notice of Default on him in accordance with clause 27 of the contract. As the default was not remedied within 14 days of service of the Notice of Default, the contract of sale terminated on 21 July 2011. Mr Whitbourne did not dispute that the contract terminated as the result of his default and he accepted that he must pay damages to Ms Pettiona.

3 The items of loss and damage claimed by Ms Pettiona comprise:

(a) the difference between the unpaid balance of the sale price of $5.85 million and the property's market value when the contract of sale terminated on 21 July 2011;

(b) interest on the unpaid balance for the period of default totalling $39,507;

(c) legal costs totalling $4,406.72; and

(d) expenses that Ms Pettiona incurred in the course of selling the property to Mr Whitbourne which were thrown away when the contract of sale terminated, quantified as $97,500 for selling agent's sales commission and $26,068 for marketing expenses.[1]

Damages consisting of the difference between the contract price and the market value of the property at the time of termination of the contract

5 On termination of the contract for default by Mr Whitbourne, Ms Pettiona could elect under clause 28.4 of the contract to retain the property and sue for damages for breach of contract or to resell the property and recover any deficiency in the price on resale and any resulting expenses by way of liquidated damages. Ms Pettiona elected to retain the property and sue for damages. The measure of damages to which she is entitled is the difference, if any, between the contract price of $6.5 million and the market value of the property at the date of termination of the contract, namely 21 July 2011.[2]

6 Both parties led evidence from certified practising valuers to establish market value. Mr Karl Cundall, on behalf of Ms Pettiona, assessed the market value of the property as at 21 July 2011 at $5.2 million. Mr John O'Grady, of behalf of Mr Whitbourne, initially assessed market value at $5.95 million. The experts held a conclave prior to trial and produced a joint report which contained a table as follows showing the valuation differences between the experts:

7 Following the conclave, both valuers produced supplementary reports to take into account sales evidence that had not been available to them when they wrote their earlier reports. Mr Cundall maintained his valuation but Mr O'Grady revised his valuation upwards to $6.15 million based on the additional sales evidence. The increase was attributable to a revised land value.

8 The first point of difference between the valuations was the basis on which the valuers valued the subject property. Mr Cundall valued the subject property on the basis that it was subject to a lease, whereas Mr O'Grady valued the subject property assuming a sale of the property with vacant possession.

9 It was the fact that the property was subject to a two year lease that commenced on

1 July 2010 and had about eleven months to run as at 21 July 2011. It was also the fact that Mr O'Grady was aware of this at the time that he did his valuation. Mr O'Grady gave evidence to the effect that he decided to value the property on a vacant possession basis because he understood from his discussions with Mr Whitbourne that the offer that Mr Whitbourne made for the property, and which Ms Pettiona accepted, was on the basis of vacant possession. Mr O'Grady said that he considered that the property should be valued on the same basis, "like with like".[5] This approach was plainly incorrect. The basis on which Mr Whitbourne had put his offer did not negate the position that it was a term of the contract that the property was sold subject to that lease. Valuing the property on a vacant possession basis was not valuing "like with like".

10 Counsel for Ms Pettiona submitted that I should prefer the evidence of Mr Cundall over the evidence of Mr O'Grady because Mr O'Grady was shown to lack objectivity in his valuation by his decision to value the property on the basis of vacant possession. I agree that some lack of objectivity is evident from Mr O'Grady's valuation approach. I did not find his explanation for his approach satisfactory, especially as he was aware that the valuation was for the purpose of assessing the damages that Ms Pettiona is entitled to recover from Mr Whitbourne in this proceeding.[6] It may reasonably be inferred that Mr O'Grady was seeking to achieve the best outcome for Mr Whitbourne. But it is not the role of an expert witness to take a partisan view by acting as an advocate for the client who retained the expert to provide an opinion.[7] The role of the expert witness is to assist the Court by giving an objective and independent opinion on matters requiring specialist knowledge within his or her expertise, uninfluenced by the expert's retainer.[8] It is necessary and essential for the expert to be impartial and to present his or her evidence objectively because the Court looks to the expert for the specialist knowledge that the Court requires to determine litigation fairly and justly between the parties. Here Mr O'Grady's objectivity has been called into question, which is a matter for the Court to take into account in evaluating his evidence and in assessing the competing valuations.[9]

11 The significance of the fact of the lease is reflected in the different values that the valuers attributed to the improvements to the property. Mr Cundall made a negative adjustment to the value of the main dwelling to allow for features about the subject property that, in his opinion, reduced its marketability. Those features included the inability to provide vacant possession because the lease still had eleven months to run as at 21 July 2011. Mr Cundall's view was that the lease had a detrimental impact on value because the fact of the lease would limit the pool of potential purchasers, irrespective of whether the rent paid was market value. Mr Cundall explained in oral evidence that it is a prestige residential property and that typically purchasers of residential properties in the prestige market would buy the property to live in and would thus want vacant possession. He said that typically people did not buy residential properties of this calibre for a rental return, rather they would most probably buy a commercial, industrial or retail property. Mr Cundall also opined that it was unlikely that the property would be purchased for the rental stream because the lease was of a very short term and "that's why it is actually more a negative than a positive".[10]

12 Mr Cundall also explained in the course of his oral evidence, that he had applied a benchmark value of $4,000 per square metre for the main dwelling which he had then discounted by ten per cent to $3,600 for reduced marketability, attributing a value of $2,080,000 for the dwelling. Mr Cundall said that it was appropriate to apply a discount to the value that he attributed to the main dwelling in recognition of the negative impact of the lease on the marketability of the subject property, as well as for other features about the physical layout and appearance of the dwelling which, in his opinion, bore negatively upon value. Mr Cundall said that the lease was a factor in fixing on the ten per cent discount but that it was not the only factor. Mr Cundall however did accept that his approach in valuing a property subject to lease in this way was unusual and he admitted that this was the first time he had adjusted for a lease in this way although, as he stated, in valuing property adjustments are made all the time for different factors.[11] Mr Cundall also said that he did not extend the ten per cent discount to the value of the other improvements on the land because it was difficult to quantify how the lease would have affected the value of those sundry improvements. The sundry improvements included the garage, pool and landscaping, which he separately valued at $290,000.

13 Regrettably, Mr Cundall's written reports made no mention of his reasoning process. Specifically, the relevance of the lease to the valuation of the improvements was not disclosed. The only mention of the lease was that "[w]e have been cognisant of the lease in our valuation",[12] without specifying how, and why, the lease was reflected in the valuation that he assessed. It was entirely unsatisfactory that this important aspect of the evidence was left to oral testimony to be explained. Mr Cundall should have disclosed his reasoning process in his reports, in accordance with his obligations to the Court which are detailed in the Expert Witness Code of Conduct. Experts must be mindful of Code when preparing their reports, which is why experts are required by the Rules of the Court to make the formal declaration in their reports that they have read, understood and agreed to be bound by the Code.[13] The provision of reasons is a substantive requirement prescribed in the Code and also by the Rules of Court.[14] There are good reasons for requiring experts fully and transparently to explain their reasoning processes in the reports that they produce for use in a proceeding. Those reasons include that the reliability and probative value of an expert's opinion will be diminished if the reasoning process for the opinion cannot effectively be scrutinised, tested and properly evaluated. A report that does not explain the expert's reasoning process is of little assistance to the Court, because it does not enable the Court to understand the basis upon which the expert has formed his or her opinion. Mr Cundall's written reports should have detailed his reasons for adopting a value of $3,600 per square metre for the main dwelling, including importantly his reasons for making a negative adjustment for the lease. The task of the Court in assessing the reliability of Mr Cundall's opinion has been made all the more difficult because he did not set out his reasons in his written reports.

14 Mr Cundall did not explain why he applied a benchmark value of $4,000 per square metre for the main dwelling before discounting to $3,600 per square metre but the explanation for the benchmark value of $4,000 per square can be discerned from a spreadsheet containing his analysis of comparable properties which was separately put into evidence. The spreadsheet showed that Mr Cundall's assessment of the dwelling values of those properties ranged between $1,833 to $4,654 per square metre. A value of $4000 per square metre can also be seen to be supported by Mr O'Grady's rate for improvements, relying on substantially the same comparative sales evidence that Mr Cundall had relied upon. Mr O'Grady adopted a rate of $4,264 per square metre. Mr O'Grady explained in his report that he reached that valuation as the "mid rate" of the general range of comparable sales that he referenced, reflecting $3,000 to $6,000 per square metre and recognising the quality of design, fixtures and finishes.[15] I am accordingly satisfied that Mr Cundall's figure of $4,000 per square metre for the main dwelling was not arbitrary or lacking some objective measure.

15 Mr O'Grady disagreed with Mr Cundall that the lease had an impact on value. Mr O'Grady's opinion was that the "safest way to approach"[16] the valuation was, in any event, on the basis of vacant possession because it was "exceedingly difficult to quantify any differentiation in value"[17] because of the lease. Mr O'Grady explained that whilst the value of commercial, industrial and retail properties can be fixed by the capitalisation of rent method, in his opinion there was not sufficient market evidence concerning prestige residential property to "derive a value subject to a lease",[18] and that "one could arbitrarily make some adjustment but that's all it would be".[19] Mr O'Grady explained that purchasers in the prestige residential property market often bought on extended settlement terms and, in his view, the price was not likely to be impacted because there was eleven months to run on the lease.

16 I prefer the evidence of Mr Cundall on this point. First, Mr Cundall's approach to value the property subject to lease was the proper approach. The lease could not be ignored altogether, as Mr O'Grady did. Secondly, I accept Mr Cundall's opinion that the fact of the lease would potentially be of significance with respect to marketability and relevant to value. For the reasons given, I have concerns about Mr O'Grady's objectivity in his approach to the task of valuation. Ignoring the lease altogether has, in my view, diminished the weight of his opinion that the lease would not devalue the property. Thirdly, the difference in valuations of the improvements was not entirely attributable to the impact of the lease. Mr Cundall's evidence was that he took the lease into account only as one of a number of features negatively impacting on marketability. In his words he was "cognisant"[20] of the lease in making his valuation. It was a matter of judgment and experience as to the impact of the features that he identified on marketability and the appropriate adjustment that should be made, and Mr Cundall's judgment was not shown to be distorted or deficient or unreliable. I therefore accept Mr Cundall's valuation of the improvements.

17 The principal difference in the valuations concerned the value attributed to the land.

18 Both valuers used comparable sales evidence as the method of determining the value of the land and both valuers had regard to substantially the same sales evidence. Nonetheless there is a significant difference between their land valuations. The difference is to be explained by the sales that each valuer considered were the most comparable and the extent of the adjustments that each made for the purpose of comparing the subject property.

19 Mr O'Grady's initial valuation was benchmarked by the property at 255 New Street, Brighton, which sold in April 2011 for $5.8 million. 255 New Street had the lowest rate per square metre of land area of the comparable sales considered by Mr O'Grady, who assessed the land value of 255 New Street at $1,820 per square metre, only slightly more than the value that Mr Cundall adopted at $1,750 per square metre. Mr O'Grady considered that the sale price for 255 New Street was a reasonable indicator of the "bedrock minimum value"[21] for the subject land. Mr O'Grady expressed the view that it was very rare to buy land in Brighton, let alone within the "golden mile" within which the subject land is situated, for less than $2,000 per square metre and his analysis of the comparable sales that he referenced bore this out. Notwithstanding this, Mr O'Grady also considered that there was an argument to devalue the perceived median value of the subject land. Mr O'Grady thought similarly to Mr Cundall that there were features of the property that would have a detrimental impact on value. He listed as "detriments" the location of the property on a controlled intersection (although noted that others might view this as an attribute) and the irregular shape of the allotment.[22] Mr O'Grady also opined that the façade was something that people either liked or disliked, "to the extent that there seems little room for a 'middle ground' position".[23] Mr O'Grady attributed what he termed "a minimal land value"[24] to the land and used as a cross check for his valuation the municipal valuation as at 1 January 2010.

20 Both valuers filed supplementary reports to take into account the details of other sales about which they were unaware when they completed their first reports. In his supplementary report Mr O'Grady considered three additional sales. Of those sales, Mr O'Grady considered that the single sale of two adjoining properties at 318A and 320 St Kilda Street, Brighton had a high degree of comparability. 318A and

320 St Kilda Street sold for $2.68 million on 30 July 2011, 9 days after the valuation date. Mr O'Grady noted that although this land is not situated on a corner position and is not on the preferred western side of St Kilda Street (the "golden mile" precinct), the land was situated within 100 metres of the subject land and had a similar larger-than-usual land area of 1,498.6 square metres. The subject land is 1,884 square metres. As 318A and 320 St Kilda Street were sold together for redevelopment, Mr O'Grady considered that the sale price reflected a pure land value on the eastern side of

St Kilda Street of $1,788.34 per square metre. Mr O'Grady stated that had he known about the sale at the time of the preparation of his first report, he would have concluded a market value of the subject land at $1,788 per square metre, based on the land value of 318A and 320 St Kilda Street of $1,788 per square metre, adjusted to $1,967 per square metre for an uplift of 10 per cent in value because of the subject land's attributes of a "preferred corner and precinct position".[25] Mr O'Grady rounded the total land value of the subject property to $3.7 million. As another cross check, Mr O'Grady noted that the subject property had been acquired in two tranches between 2000 and 2006 at the combined cost of $2,735,000, which is $90,000 less than Mr Cundall's valuation as at July 2011, more than five years after the second tranche of the property was acquired. Mr O'Grady opined that given the historic combined cost of $2,735,000 by May 2006, a value of $3.7 million "could have well been achievable as a credible underlying land value as at July 2011".[26]

21 Mr Cundall adopted a rate of $1,500 per square metre for the land value. Mr Cundall's first report again suffers the deficiency that he did not identify his reasoning process for adopting that rate. In his supplementary report, Mr Cundall wrote that this rate took into account the size of the land, its irregular shape, its corner location, an overlooking aspect of the adjoining property and its location on a busy road.[27] Mr Cundall supported that valuation by reference to the sale of 360 St Kilda Street on

3 December 2011. He noted that this sale price, which worked out at $1,645 per square metre of land area, was effectively representative of land value because the dwelling was demolished after sale. Mr Cundall opined that the relevance of this sale was that it demonstrated the locational influence of being on a primary main road, compared to other non-main road sales within the golden mile precinct. Mr Cundall observed that the rate per square metre differed markedly from the analysed rates of inside blocks on non-main road streets and that this difference emphasized that a busy main road location had a significant detrimental impact on value. In cross-examination, Mr Cundall said that the adoption of the rate of $1,500 per square metre was "a matter of judgment" based on comparable sales evidence adjusted for what he termed were "negative attributes" of the subject property.[28] He repeated the features noted in his supplementary report but also mentioned that it is a large property with a single building covenant on the title, which limits its potential.[29]

22 The other differences between Mr Cundall and Mr O'Grady's opinions may be distilled as follows. Mr Cundall disagreed with Mr O'Grady that the sale price for

255 New Street, Brighton provided evidence of minimum land value of the subject property, reasoning that 255 New Street is on a less busy road which, in his view, gives it a superior location to the subject property. Mr Cundall also disagreed that 318A and 320 St Kilda Street provided a sufficiently comparable sale because, he said, that land was sold as a development site whereas the subject property is a single house site, with a single building covenant on the title and does not allow for comparison of "like with like". Mr O'Grady had a contrary view, and maintained that developers and residential purchasers competed with each other for property in the golden mile area of Brighton. Mr O'Grady also disagreed with Mr Cundall that

360 St Kilda Street was a better comparable, reasoning that the subject property is better located than 360 St Kilda Street because that property is positioned on an extremely busy part of St Kilda Street and, unlike the subject property, is not a corner block and does not have ingress and egress from a quieter street. The cross-examination of the valuers also explored their differing views on the appropriateness of using property sales in the first half of 2010 as comparators and on the reliability of the municipal rates valuation and sales history to support valuation.

23 It is undoubted that the valuation of land is not an exact science[30] and that some adjustment must be made for differences between the subject property and the comparable sales evidence. It is also undoubted that each adjustment is a matter of judgment but the critical difference between the two valuers in this context is that Mr Cundall's opinion that the land should be valued at $1,500 per square metre rested upon what he said were negative aspects of the property. Mr Cundall accepted that land values within Brighton are generally over $1,800 per square metre,[31] which was borne out by the sales evidence to which he had regard, but Mr Cundall did not in either of his reports set out how the sales to which he did have regard supported a land value of $1,500 per square metre, nor did he set out why a significantly lower rate than the $1,800 per square metre rate which generally applied to properties in Brighton should apply to the subject property.

24 Mr Cundall used the direct comparison method of valuation, but none of the sales that Mr Cundall referenced in his two reports had land values as low as that which he attributed to the subject property. Whilst Mr Cundall supported the negative adjustment to value by the factors that he identified, none of the comparators used were an indicator of the scale of the discount that should be applied. It is not possible to evaluate the process of reasoning employed by Mr Cundall by which he fixed on the amount of $1,500 per square metre and not on some other amount. As I understood Mr Cundall's evidence, the value of $1,500 per square metre that he settled on was a matter of judgment, but missing was his explanation of either the steps by which he arrived at that value by reference to the sales that he used as comparators or his methodology in appraising the negative features of the subject property. Furthermore, I was troubled by the significance that he placed in oral testimony on the single building covenant to justify the value of $1,500 per square metre. I observe that this was not a reason that he had mentioned in either of his written reports and was only put forward for the first time in the course of oral evidence. This suggested in my mind that Mr Cundall was endeavouring to prop up his testimony.

25 In this context, it also becomes pertinent that the evidence suggested an overlap in the element of judgment on his part justifying the discounted value of improvements and the fixing of a lower land value at $1,500 per square metre.[32] I could not with confidence conclude that Mr Cundall had not brought some of the same factors to bear in settling upon his valuation figures for land and improvements.

26 Mr O'Grady's valuation, on the other hand, is objectively measurable against the sales that he used as comparators and Mr O'Grady explained his process of reasoning for relying on 255 New Street and 318A and 320 St Kilda Street to attribute a minimum land value for the subject property, on which he was extensively cross-examined. Critically, Mr O'Grady's reliance on those sales as an indicator of minimum land value of a golden mile property was not shown to be irrationally based or unreliable. Furthermore, Mr O'Grady used the municipal rates and the sales history of the property as cross checks. Whilst those factors cannot be relied upon to support the valuation reached, they nonetheless provide some assurance that the valuation may be accepted as reliable. In the circumstances, I place greater reliance on Mr O'Grady's assessment of market value in this context, and accept the sale of 318A and 320 St Kilda Street as providing a sufficiently reliable indicator of value of the subject property. However, I am not convinced that an adjustment of ten percent is required for preferred corner and precinct position. Mr O'Grady did not make such an adjustment in deriving his initial valuation and given my concern about his lack of objectivity, I am not persuaded that he has justified the uplift.

27 In light of my findings, the measure of damages will be the difference between the unpaid balance of the sale price of $5.85 million and the market value of the property as at 21 July 2011, which I determine to be as follows:

Land at $1,788 per square metre on land size of 1884 square metres: $3,368,592

Total value of property as at 21 July 2011: $5,738,592

Interest in the amount of $39,507 on the unpaid balance

28 Mr Whitbourne does not dispute that Ms Pettiona is entitled to interest on the balance of $5.85 million for 17 days from 4 July 2011 to 21 July 2011 at 4.5 per cent in accordance with the general condition 26 of the contract as amended by special condition 1.1(ii). However, Mr Whitbourne argued that the rent that Ms Pettiona received for the period of 4 January 2011 to 21 July 2011 must be set off against the interest entitlement. Mr Whitbourne relied on the decision of the Full Court in Mallet v Jones[33] and special condition 14.3 of the contract.

29 Mallet v Jones concerned a claim for damages recoverable by a vendor on the rescission of a contract of sale of land. The vendor claimed that he was entitled to occupation rent from the defaulting purchaser for the period that the purchaser had been in possession of the property as well to retain the interest on purchase price that the vendor received as a component of weekly payments made by the purchaser up to the time of default. The Court rejected the claim for occupation rent, holding that the vendor was not entitled to occupation rent as well as the interest received.

30 The submission that Mallet v Jones supports the set-off claimed is rejected. The reasoning of the Court in Mallet v Jones that the vendor could not have both occupation rent and interest was based on a term of the contract which provided for the repayment to the purchaser of the instalments of purchase price less the interest received. The Court held that the term "impliedly negative[d] any further deduction from the instalments of purchase money".[34] Here, in point of distinction, Ms Pettiona has the contractual right to interest on the money owing under contract during the period of default "without affecting any other [of her] rights".[35] Mallet v Jones is distinguishable and does not stand for the legal proposition asserted.

31 Special condition 14.3 does not assist Mr Whitbourne either. Special condition 14.3 provided that:

At settlement the vendor must allow in the purchaser's favour an amount equal to all rent or licence fees or occupation fees paid in respect of all tenancies and in respect of the period after the day's settlement takes place -

The provision thus applied only if the contract was completed. As the contract was not completed, the provision has no application.

32 This item is not in dispute and Ms Pettiona is entitled to recover her legal costs totalling $4,406.72.

33 It was correctly accepted by counsel for Ms Pettiona that these charges do not constitute damages suffered by Ms Pettiona as a consequence of the breach of contract by Mr Whitbourne.[36] But an argument was advanced that Ms Pettiona was entitled to recoup those monies by way of enforcing her contractual right to receive a 10 per cent deposit, which amounted to $650,000. Reliance was placed on clause 28.4(a) of the contract which provided that if the contract ends by a default notice given by the vendor, the deposit up to 10 per cent of the price is forfeited to the vendor as the vendor's absolute property, whether the deposit has been paid or not. A deposit of $650,000 was paid when the contract was entered into but the agent's commission and the marketing expenses were paid out of that deposit. It was put that Ms Pettiona thus had not had the benefit of the full deposit of $650,000 because of the amounts paid out.

34 The argument is without any merit as the uncontroversial fact is that Ms Pettiona was paid the full deposit of $650,000. The fact that she then applied those funds to the payment of expenses incurred by her does not negate the fact that she received the full deposit from Mr Whitbourne.

35 In light of my findings, Ms Pettiona is entitled to damages quantified as the amount of:

Difference between purchase price and market value at termination

36 I will hear argument on the question of costs and interest.

[1] A claim for damages for loss of use of the unpaid balance of the sale price from 22 July 2011 to the date of the commencement of the proceeding was abandoned at trial.

[2] Berry v Mahony [1933] VicLawRp 50; [1933] VLR 314, 322-323 (Mann ACJ); Victorian Economic Development Corporation v Cloverdale Pty Ltd [1992] VicRp 40; (1992) 1 VR 596, 604 (Tadgell J); Portbury Development Co Pty Ltd v Mackali [2011] VSC 69, [34] (Kaye J).